Financial Terms

I have found that consumers sometimes find it difficult to understand the information they are given by finance professionals because they don’t know the big words being used or how that particular part of personal finance works. I have therefore created an A-Z list of common terms which could help you understand the information you are being given by personal finance professionals, lenders etc.

I hope you will find it to be useful.

A

Annual Equivalent Rate (AER) – a notional rate that illustrates what the annual rate of interest would be if the interest was compounded each time it was paid. Where interest is paid annually, the quoted rate and the AER are the same.

Annual Percentage Rate (APR) – It’s the percentage rate which your loan will cost you each year, including all charges.

Appreciation – Increase in the price (or value) of a share or other asset. Appreciation is one component of total return. Payment of an income, in the form, say, of a dividend, is another.

Arrears – Amount overdue as a result of being behind payments.

Asset – Something that has earning potential or value.

Attachment of Earnings – This forces the debtor’s employer to make deductions from the debtor’s earnings and pay them to the creditor.

B

Bailiffs – Bailiffs are officers of the court, who can in certain circumstances be used by creditors to enforce judgments by collecting debts and repossessing homes or goods.

Bankruptcy – Bankruptcy is legal procedure for dealing with debts when you cannot pay.

Budget – A document listing details of income and expenditure.

Budget Deficit – The amount on your budget by which your expenditure exceeds your income before allowing for offers of payment on non-priority debts.

Budget Surplus – The amount on your budget by which your income exceeds your expenditure before allowing for offers of payments on non-priority debts.

Budgeting – The process of managing outgoings so that they don’t exceed income.

Building Society – A mutual organisation, owned by the people saving with it and borrowing from it. Increasing numbers have converted to banks in recent years, paying windfall profits to the owners.

C

Certificate of deposit (CD) – Also called a time deposit this is a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited. A CD has a maturity date and a specified interest rate, and can be issued in any denomination. The duration can be up to five years.

Compound Interest – The investors’ best friend. £100 invested in the stock market in 1918 would be worth around £1,000,000 today, according to calculations done by Barclays Capital, a London merchant bank.

Contractual Payment – Payment agreed in the original contract with the creditor.

County Court Claim – This secures the debt on your home usually with conditions concerning payments. A charging order has the effect of converting an unsecured debt into a secured one.

County Court Judgment (CCJ) – Gives details of the court’s decision of a creditor’s attempt to recover a debt in a civil court.

Credit Crunch – A sudden reduction in the general availability of loans (or credit), or a sudden increase in the cost of obtaining loans from the banks.

Credit Limit – The amount of credit that a financial institution extends to a client. Credit limit also refers to the maximum amount a credit card company will allow someone to borrow on a single card.

Credit Rating – A credit scoring system which gives points to items of information given on your application form when applying for credit.

Creditor – Someone to whom you owe money.

D

Debt Consolidation – This is taking a new loan and using the proceeds to pay off several smaller debts.

Debt Management Plan – This is a repayment scheme administered by a Consumer Credit Counselling Service for people unable to pay their creditors the full contractual payments.

Debtor – Someone who owes money.

Direct Debit – The account holder instructs the bank or building society to comply with requests from a third party to make a series of payments to them.

Dividend – A distribution from a company to a shareholder in the form of cash, shares, or other assets. The most common kind of dividend is a distribution of earnings.

Downshifting – Making major changes to one’s lifestyle caused by accepting a reduced level of income.

E

Equity – The difference between the market value of your house and the amount outstanding on your mortgage.

F

G

Gilts – When the government needs to borrow money, it sells you these. They are government bonds and as a rule the interest is paid gross (i.e. free of tax). They are very safe and their US equivalent is the Treasury bill, or “T-Bill”.

Gross – The payment of any form of income (interest or dividend payout) without the prior deduction of tax.

H

Hire Purchase – An agreement where goods are hired for an agreed period, at the end of which the hirer has the option to purchase.

House Poor – A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations like vehicle payments.

I

Individual Retirement Account (IRA) – An investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.

Individual Savings Account (ISA) – ISAs started in April 1999 and replaced PEPs and TESSAs. ISAs are schemes to protect your investments (shares, bonds, cash or insurance funds) from tax. They can be regarded as tax-free wrappers.

Individual Voluntary Arrangement (IVA) – A means of protecting yourself from your creditors by entering into a legally binding agreement supervised by an Insolvency Practitioner.

Inflation – A fall in the value of money.

Insurance – A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.

Intestate – The act of dying without a legal Will. Determining the distribution of the deceased’s assets then becomes the responsibility of a probate court.

J

Joint and Several liability – If two or more parties enter into a credit agreement they will each be liable for repaying the whole amount borrowed.

K

L

Late Fees – Fees added to the amount owed by the debtor when payments are late and where such fees are allowed for in the original contract.

M

Monthly Expenses – The amount of money needed each month to pay your rent or mortgage, your gas, electricity and water, your food and other living expenses.

Mortgage – A loan to buy a home, where you put up the property as a security against you paying back the loan. Mortgages offer by far the best long-term interest rates of any loan because they are the least risky of loans.

Mutual Fund – The US equivalent to UK’s unit trust.

N

Negative Equity – When the value of an asset falls below the outstanding balance on the loan used to purchase that asset. Negative equity is calculated simply by taking the value of the asset less the balance on the outstanding loan.

Nest Egg – A special sum of money saved or invested for one specific future purpose.

Non-Priority Debts – Non-Priority Debts are those where the creditor cannot deprive you of liberty, home or essential goods and services.

O

P

Portfolio – A collection of securities that provides a balance across several sections of the market. This provides maximum exposure to high returns while minimising risk.

Price-to-Earnings (P/E) ratio – The P/E ratio of a stock is a measure of the price paid for the share relative to the annual income or profit earned by the company per share.

Priority Debts – Priority debts are those where non-payment gives the creditor the right to deprive you of your liberty, home or essential goods and services.

R

Repayment Mortgage – The monthly repayments paying off both the interest and the capital on the mortgage. During the earlier part of the mortgage term, the majority of the monthly payment goes towards the interest.

Repossession – Process by which a creditor with a loan secured on house or goods (e.g. car) can take possession if you do not maintain agreed payments.

S

Secured Loan – Where the lender has a legal charge on assets (usually a house) giving rights of repossession over that asset if payments on the loan are not maintained.

Share – A security that represents part-ownership of a company.

Shareholder – If you buy even one share in a company, you can proudly call yourself a shareholder. As a shareholder you get an invitation to the company’s annual meeting, and you have the right to vote on the members of the Board of Directors and other company matters.

Standing Order – This is an instruction signed by an account holder ordering a Bank or Building Society to make regular payments from an account of specified amounts on specified dates.

T

Term Life Insurance – A no-nonsense life insurance plan where you pay low premiums that will increase as you get older. When the term of the insurance comes to an end, you get nothing, except the satisfaction of still being alive.

U

Unit Trust – A collective investment that pools investors’ money, managed by a professional fund manager.

Unsecured Loan – A loan that is not secured on borrower’s property or goods.

W

Warrant of Execution – This is issued by the County Court at the creditor’s request allowing the court bailiffs to attempt to take and sell goods and use the proceeds to pay the debt.

Welfare Benefits – State funded allowances paid to those in certain defined circumstances including low income and disability.